(Adds new comment, yield curve, yield milestones)

* US to deploy more troops to Middle East, pushing oil

prices up

* Iran attacks Kuwait oil refinery, adds to market stress

* Inflation swaps show higher consumer prices in next 12

months

* US rate futures start to price in rate hike

By Gertrude Chavez-Dreyfuss

NEW YORK, March 20 (Reuters) - U.S. Treasuries declined

for a third straight session on Friday, tracking the broader

selloff in UK and European government bonds, as escalating

Middle East tensions kept oil prices elevated and reinforced

inflation worries.

U.S. two-year yields, which move inversely to prices and

have been rising for three straight weeks, were on track for

their largest three-day rise since last April. The yield, the

most responsive to interest rate expectations, was last up 5.9

basis points (bps) at 3.892%.

The benchmark 10-year yield also increased, up 10.5 bps at

4.388%, on pace for its biggest one-day rise since

early June 2025. Earlier in the session, it hit its lowest since

July.

British and European government bonds sold off as well.

"We saw a fairly decent selloff in European bonds. And

that's just forcing a selloff as well in U.S. Treasuries," said

Tom di Galoma, managing director of global rates trading at

Mischler Financial Park City, Utah. "People are also worried

that we're getting close to the weekend and we're going to see

severe battle in the Middle East that could cause another push

higher in oil."

U.S. crude futures were last up 3% at $98.32 per barrel

. Since the beginning of the month, crude futures have

risen 47%, the largest monthly gain since May 2020.

"The spike in energy prices is pushing inflation expectations

higher, particularly in Europe, and this is causing that ripple

effect across global bond markets," said Chip Hughey, managing

director of fixed income at Truist Wealth in Richmond, Virginia.

"There is also a growing consensus that some central banks will

potentially need to respond to an inflation shock by not only

ending their rate cut cycles, but actually pivoting to rate

hikes this year."

On Friday, three U.S. officials told Reuters that the U.S.

military is deploying a large amphibious assault ship with

thousands of additional Marines and sailors to the Middle East.

That report came after Iran attacked an oil refinery in Kuwait

on Friday and Israel killed a spokesman of Iran's Revolutionary

Guards.

U.S. rate futures on Friday began to price in the

possibility of an interest rate hike later this year, with

markets assigning a 32% chance of tightening by November,

according to LSEG estimates, up from virtually zero late on

Thursday.

That shift in policy expectations fed through to the curve,

which steepened for the first time in five sessions as the

spread between two- and 10-year yields widened to

49.6 bps from 45.4 bps late Wednesday.

The curve showed a classic bear-steepening pattern, with

long-term yields climbing more rapidly than short-term rates as

investors priced in a heightened risk of reaccelerating

inflation, at which point the market could anticipate a Fed rate

increase to battle the rise in prices.

In other Treasury maturities, the belly of the curve sold

off sharply as well. U.S. five-year yields advanced 8.6 bps to

4.006%, while seven-year yields rose to 4.20%, up

10.6 bps.

British 10-year government borrowing costs soared to their

highest level since the global financial crisis. The 10-year

gilt yield was last up 14.7 bps at 4.995% after

earlier hitting 5.022%, the highest since mid-2008.

Germany's 10-year yield also hit the highest

since 2011 and was last up 8.6 bps at 3.038%.

"Europe has a larger dependency on imported energy,"

Truist's Hughey said. "That makes it more vulnerable to supply

shortages caused by the conflict in Iran. Meanwhile, the U.S. is

a net exporter of energy, which does provide some insulation

from oil supply shortages."

Inflation swaps, a measure of the outlook for future

consumer prices, hit a six-month peak of 3.3% on

Friday. This reflected expectations that the U.S. consumer price

index will average more than 3% over the next 12 months. That is

in stark contrast with the latest CPI reading of 2.4%

year-on-year in February.